Effects on Consumption

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  • Created by: lyd_kate
  • Created on: 30-01-17 15:30
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  • Consumption Effects
    • Interest Rates
      • Rewards for sacrificing consumption
      • Higher rate = more % of money earned
      • High % leads to more saving
      • Low % leads to more borrowing
    • Level of Income
      • Main determinator
      • Keynesian theory of Consumption & Spending
        • Income rises - less consumption as proportion of income
        • Fraction saved increases
        • Recession is caused by too much saving, not enough spending
        • Absolute levels of income increase
    • Expected future income
      • People plan savings and consumption on how they expect their income to change over time
      • Life Cycle Theory of Consumption
      • Temporary fluctuations in year income have little impact on e.g. pensions
    • Wealth
      • Higher valued assets lead to an incentive to consume more
      • More borrowing partially due to need to take out larger mortgages
      • People can take out a larger mortgage and spend what they borrow - equity withdrawal
      • Can also affect shares
    • Consumer Confidence
      • Optimism increase = less saving, more spending
        • Governments wants this - try to enhance credibility of policies to achieve this
      • Pessimism = vice versa
    • Availability of Credit
      • If credit is easy to obtain, consumption increases
        • People supplement current income by borrowing on credit created by banking system.
      • Credit crunch - there is a lack of funds in the credit market, difficult to obtain finance - increased cost
    • Distribution of Income
      • Rich people save greater proportion of income
        • Rich to poor - increases consumption, reduces saving
    • Expectations of future inflation
      • Uncertainty caused by fears of rising inflation - precautionary saving & reduces consumption
      • Could increase consumption to avoid future high prices
      • Borrowing increase - house prices up faster than inflation

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